CHICAGO — The financially strapped Chicago Public Schools released a $5.2 billion proposed budget for fiscal 2013 that closes a $665 million gap with a property tax hike, operating cuts, and by digging deeply into reserves and draining its unreserved fund balance.

The spending plan includes a $4.7 billion operating budget, a scaled-down $110 million capital budget, and funds for debt service. CPS is planning on issuing $500 million of new-money debt and possibly about $100 million in refunding bonds.

Much of the new money will finance previously approved projects. Borrowing in the next couple years is expected to dwindle as the system scales back new capital spending from more than $600 million this year to $100 million to $200 million annually over the next five years.

The new-money would price in late summer or early fall. Goldman Sachs & Co. and Loop Capital Markets LLC are the lead managers. Public Financial Management Inc. and Peralta Garcia Advisors are financial advisers.

The $432 million raid on various district reserves will leave it ill-prepared to deal with a deficit of up to $1 billion in fiscal 2014, when teacher pension payments will skyrocket, a financial watchdog group has warned. Rating agencies likely will frown on such a steep use of one-time fixes to close the budget gap.

CPS leaders defended the move as needed to avoid drastic education cuts that would have driven up average classroom size to 50 students and forced the elimination of many programs and pre-school.

“We reduced spending this year by scrubbing through our budget line by line, contract by contract, program by program, and using every available tool to protect investments in student learning,” CPS chief executive officer Jean-Claude Brizard said in a statement. “We will not sacrifice our children’s education during a time of fiscal crisis and must continue to make investments that will support their growth.”

“The proposed budget is delaying the inevitable by not addressing the financial realities CPS faces,” countered Chicago Civic Federation president Laurence Msall.

The local government research group had praised the district’s last budget. “Next year it will face a catastrophic deficit with no reserves if this budget as proposed is adopted,” he said.

The budget moves more discretionary funding to principals to implement an expanded school day that takes effect in the upcoming school year, protects pre-school and current full-day kindergarten, and funds a 2% raise for teachers and other employees.

The 2013 budget gap stems from rising personnel, pension and debt service expenses at the same time that the district faces a $114 million drop in state and federal support.

In addition to tapping various reserve accounts, the budget trims $144 million in spending and will raise its property tax levy by the maximum amount allowed under tax caps to generate $62 million in additional revenue. Some debt restructuring may also help close the shortfall.

CPS will exhaust all of its $349 million unrestricted fund balance — which provides a liquidity cushion and has long been cited as a positive credit factor — and draw $25 million from a restricted fund balance. It will also tap a reserve of $58 million in Illinois fiscal 2012 funds not used. 

The district has in recent years relied heavily on one-time fixes to balance its books, including debt restructuring, reserve use, tax-increment financing surplus funds freed up by the city, and federal stimulus aid. The actions have contributed to rating downgrades.

CPS officials defend their choices in budget documents. “This creates challenges for fiscal year 2014, but we felt we had to use all available resources to invest in helping children access a high-quality education rather than sitting on funds for another 'rainy day,’ ” the documents read. The administration will also ask the Chicago Board of Education to ease a current rule requiring quick replenishment of reserves.

Moody’s Investors Service last year downgraded the board’s $5.7 billion of debt one notch to Aa3, citing mounting fiscal pressures on the district’s balance sheet from rising costs, state aid delays and a high debt burden.

Fitch Ratings last year affirmed the board’s A-plus rating and stable outlook. It downgraded the district in 2010.  Standard & Poor’s last year affirmed its AA-minus rating while revising its outlook to stable from negative.

Fiscal 2014 poses a severe challenge to the district’s financial position due to the expiration of a three-year partial pension holiday granted by state lawmakers. The district has budgeted $196 million for teacher pensions in fiscal 2013. That number will more than double to $534 million in fiscal 2014.

“This huge growth in pension costs threatens to crowd out core spending on classrooms,” according to budget documents.

Chicago Mayor Rahm Emanuel, who appoints Board of Education members and handpicked Brizard, is seeking state action on a pension overhaul that could ease the future jump in payments, but it’s unclear how soon lawmakers may act.

CPS also is facing labor strife as it negotiates new teacher contracts. Teachers have threatened to strike over compensation and classroom issues and called the 2% proposed raise insufficient.

District officials note that personnel salaries and benefits consume about $3.5 billion of the system’s budget.

The district earlier this year predicted a steeper $700 million deficit, but ended up receiving additional state aid and property taxes as spending came in below budgeted levels.

The Board of Education is expected to vote on the plan July 25. The nation’s third-largest public school district serves more than 400,000 students at more than 675 schools.

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